Bears Are Wrong, Citi Says, US Consumer Is Strong

Citi argues that, contrary to popular belief (and, in our opinion, compelling evidence), the US consumer is doing just fine:

Consumer spending has not collapsed as feared. Despite the pressure from higher energy and food prices, home price declines, foreclosure activity, rising delinquencies, a slumping job environment, and weak stock prices, the American consumer has demonstrated remarkable resilience, topping most expectations. [Spending may have "topped expectations" of collapse, but this doesn't mean the consumer is strong. And not clear how long that "resilience" will last.]

Tax rebate checks do not explain the strength. Rebate checks went out in early May, for the most part, and thus are likely to be spent mainly in 2Q08. Yet, the bulk of the benefit (as much as 75% of the total $120 billion in rebates) will be usurped by higher gasoline prices. If the timing of the rebates had not been this fortuitous, things would have been worse, but it does not necessarily support spending gains. [We worry that many consumers were spending the checks before they even arrived.]

The energy and food bite has not been as dramatic as perceived. In the face of substantial increases in energy prices since the beginning of the decade, consumer expenditures for gas, public transportation, electricity and heating fuel has stayed roughly around 10% of total consumer expenditures, though one must acknowledge that the most recent spectacular spike in oil and gas prices is having some clearly negative impact. [Yes. As Asha Bangalore at Northern Trust notes, gas alone is now eating a bigger percentage of American incomes than at any time since the early 1980s.]

We agree that consumer spending has not collapsed as quickly as some feared. It's certainly not strong, however. And given recent trends in inflation, real spending, wages, consumer debt, etc., we think the train-wreck is probably just happening in slow motion.